Course Code:19BFS507A

Investment Banking and financial Services

Financial institutions

Course Leader:
Ms. Reshma K.J
reshma.ms.mc@msruas.ac.in
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 Session Objectives
At the end of Session Students will be able to :
 Discuss the concept of Credit Rating Agencies

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 Credit Rating

• A credit rating estimates the credit worthiness of an a financial

security, a corporation, local government or even a country
• It is an evaluation made by credit reporting agency of a risk of
buying into a specific security offering and based on a number of
factors
• Typically, a credit rating tells a lender or investor the probability of
the subject being able to meet payment requirements for interest
and principal repayment
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 Credit Rating

• A Credit Rating issued by a credit rating agency is an assessment of

the credit worthiness of individual financial securities (For example,
a bond) and debt issued by corporations, government issued
securities or even a country’s ability to repay debt
• Credit ratings are forward-looking opinions about credit risk
• It express the agency’s opinion about the ability and willingness of
an issuer, such as a corporation or state or city government, to
meet its financial obligations in full and on time
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 CREDIT RATING

• It is the opinion of the rating agency on the relative ability and willingness of the issuer of
the debt instrument to meet the debt obligations as and when they arise
• For the investor it is an indicator expressing the underlying credit quality of issue programme
• In India there are three major credit rating agencies namely
• CRISIL [Credit Rating Information Services if India limited.]
• ICRA [Investment information and credit rating agency of India limited]
• CARE [Credit Analysis and Research in Equities.]

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 Credit Rating

• It is an opinion on the future ability and legal obligation of an issuer

to make timely payments of principal and interest on a specific
fixed income security
• As per credit rating agencies regulations 1999 rating means

– An opinion regarding securities

–Expressed in the form of standard symbols
– Assigned by a credit rating agency

– Used by an issuer of such securities

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 CRISIL rates a wide range of entities, including

• CRISIL: Credit Rating Information Services if India limited.]

• Industrial companies , Banks , Non-banking financial companies

(NBFCs) ,Infrastructure entities , Microfinance institutions ,
Insurance companies , Mutual funds , State governments , Urban
local bodies

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 Credit Rating (Contd..)

• Good rating helps the corporate borrowers to raise funds at a

cheaper rate
• In determining the rating, both qualitative and quantitative
analysis is employed by the credit rating agency
• The judgment given is essentially qualitative in nature
• Credit rating does not amount to a recommendation to
purchase, subscribe, and hold a debt instrument

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 What is Credit Rating?

 A current opinion on the relative creditworthiness

of debt
 An issue specific evaluation

 Aimed at differentiating credit quality

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 What Credit Rating is not ?

Not an audit of the issuing company

Not a one time assessment of creditworthiness of the issuer

Not a general purpose certification of goodness of a
company

Not a recommendation to buy, hold or sell the rated security

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 Credit Rating Agency

• CRISIL: Credit Rating and Information Service of India

Limited is the India’s first credit rating agency (1987)
• ICRA: Investment Information and Credit Rating Agency
of India Ltd (1990)
• CARE: Credit Analysis and Research Ltd (1993)

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 Credit Rating Symbol

Separate sets of symbols are used for:

1. Long Term debt instruments

2. Medium Term debt instruments

3. Short-term debt instruments

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 Credit Rating Symbol (Contd..)

• Long- term instruments include debentures, bonds etc of

companies
• Medium-term instruments include public deposit and other
medium duration securities
• Short-term instruments include commercial papers and other type
of short-term securities

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 Symbols for Long Term
Terminology CRISIL ICRA Rating CARE Rating
Rating
Highest AAA LAAA Case AAA
High AA LAA Case AA
Adequate A LA Case A
Moderate BBB LBBB Case BBB
Inadequate BB LBB Case BB
Risky B LB-Risky Case B-Risky
LC-Substantial Risk Case C-High Risk
LD-Expected to Default Case D-Likely to Default

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 Symbols for Medium Term
Terminology CRISIL Rating ICRA Rating CARE Rating
Highest FAAA MAAA Case AAA
High FAA MAA Case AA
Adequate FA MA Case A
Inadequate FBB MB Case BBB
Risk Prove FB MC Case BB
Default FD MD Case B-Risky
Expected Case C-High Risk
Case D-Likely to Default

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 Symbols for Short Term

• CRISIL : P1 to P5
• ICRA : A1 to A5

• CARE : PR1 to PR5

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 Credit Rating Procedure

Issuer company appoints a rating agency

Rating agreement is entered into

Analytical team is assigned the work of Rating

Meeting with issuer

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 Collection of data

Rating exercise by the analytical team

Meeting with Issuer for resolving questions

Analyses of new and emerging facts

Preparing of Rating Profile

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 Notification of Rating Discussion to the Issuer

Communication of Rating symbol to Issuer

Acceptance

Formal Notification

Surveillance
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 Benefits of Credit Rating

• Low cost Information

• Quick investment decision
• Control on the Company
• Simplicity of Rating

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 Credit Rating Agencies in India

• CRISIL- Credit Rating Information Services Limited

• ICRA-Investment Information and Credit Rating Agency of
India
• CARE-Credit Analysis and Research
• DCR India-Duff Phelps Credit Rating Pvt. LTD.

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 ORIGIN OF THE CONCEPT OF CREDIT RATING

• This concept originated in the US in 1909 when the founder of

Moody's Investors Service
• The relevance of this concept was realized only after the great
depression when investors lost all their money
• Lack of symmetric information & high cost of collecting information
increased the popularity of credit rating agencies
• The worlds biggest rating agencies are Moody's Investor Service
and Standard & Poor’s (S&P)

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 CREDIT RATING AGENCIES IN INDIA

• The prominent credit rating agencies in India are

• CRISIL - Credit Rating and Information Services of India Ltd.

• ICRA - Investment Information and Credit rating Agency of India
Ltd.
• CARE Ratings - Credit Analysis and Research Ltd.

• CRISIL is the market leader in the credit rating industry with 70 per
cent market share

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 Limitations of Credit rating India

• The credibility of rating is questionable

• A frequent revision of grading by credit rating agencies

• The rating agencies do not perform an audit but rely solely on
information provided by the issuer
• Rating agencies offer consultancy and financial advice to the clients
whose paper they rate

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 Summary (Contd..)

• A credit rating estimates the credit worthiness of an a financial security, a

corporation, local government or even a country
• An investor uses the ratings to assess the risk level and compares the offered rate
of return with his expected rate of return (for the particular level of risk) to
optimize his risk-return trade-off

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